A CFD is a contract between two parties in which both agree to pay the difference between the opening and closing prices of an asset or a market.
The parties do not own the real asset.
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How does it work?
In simple terms, trading a CFD is essentially speculation on the movement of the asset’s price, either up or down, because you don’t own the asset or product.
A short CFD, often known as short selling, is a CFD contract in which you bet on the price to fall.
A long CFD, also known as going long, is a CFD contract in which you bet on the price to rise.
CFDs give traders and investors the opportunity to open a bigger trade with a small deposit due to the use of leverage. Margin is the percentage of capital that the trader needs to use to open a trade. Keep in mind that while leverage can magnify potential profits, it can also go the other way and increase the risk and potential losses.
What are CFDs used for?
You can use CFDs for short or mid-term speculation. This means that day traders and swing traders try to catch price movements for a profit.
Traders and investors normally don’t use CFDs for long term investing or trading because CFDs have overnight holding costs. The overnight costs depend on the asset and for some more exotic or risky assets they are typically very high.
Investors can also use CFDs on some occasions as a way to hedge their actual share/etf portfolio in the short or mid term.
How much does it cost to trade CFDs?
In most cases traders will only pay what is known as the spread (the difference between the buy and the sell price) and overnight holding costs when they trade CFDs.
Some brokers may also charge commission per volume traded, but they typically do that for markets where they offer very tight spreads.
What Markets are available?
You can trade FX, Index, Stock, Crypto, Fixed Income and Commodities CFDs.
What is the difference between CFDs and Spread Betting?
You can check the differences between spread betting and CFDs in this article.
We hope that you found this article useful.
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